Chinese Carmaker to Cut Costs by Using Local Components

From China Daily

CHANGCHUN, China — FAW VW, German car maker Volkswagen’s joint venture with First Automotive Works Corp (FAW), has vowed to increase the amount of locally-produced parts in its cars to cut costs under persistent pressure from the strong euro.

It has been the joint venture’s “top priority”, according to FAW VW President Qin Huanming.

The venture in Changchun, capital of Northeast China’s Jilin Province, plans to cut components costs by $205.3 million (USD) this year mainly through increasing local content, Qin said.

He revealed the plan in an interview with China Daily last Friday when the venture launched a Caddy multi-purpose sedan in Suzhou, a booming city in East China’s Jiangsu Province.

FAW VW, one of the biggest Sino-foreign carmaking joint ventures, aims to raise the proportion of local parts in Volkswagen cars to 85 percent on average by the end of 2006, Qin said.

The current proportions in the Jetta, Bora A4, Golf A4 and Caddy made by the venture stand at 98 per cent, 65 percent, 60 percent and 40 percent respectively.

The average locally-made parts rate of the Audi A6, new Audi A6L and Audi A4 sedans built at the venture will rise to 60 percent “as soon as possible” from nearly 50 percent at present, he said.

Audi, owned by Volkswagen, has a 10 percent stake in the venture.

“We have been suffering a lot from the strong euro,” Qin said.

FAW VW’s costs grew by $241.5 million last year from 2003 due to the strong euro, he said.

The euro’s exchange rate against the U.S. dollar rose by nearly 20 percent last year from 2003.

FAW VW will cut costs by 60 percent if it uses domestically-made rather than imported parts and components, according to Qin.

FAW VW will encourage its suppliers in Europe to set up wholly-owned ventures or joint ventures with partners in China, he said.

“All car makers, from Europe, Japan and the United States, should raise local content of their cars made in China, not only to cut costs but also to respond quickly to changes in China’s car market,” said Yale Zhang, a Shanghai-based analyst from U.S. auto consulting firm CSM Worldwide Corp.

“Cost-controlling has been one of the most important tasks for car makers operating in China because it has been a key field of competition as well as for boosting sales due to the slowing car market and sagging car prices,” Zhang told China Daily.

They are also suffering from soaring costs of raw materials, such as steel and rubber, he added.

Besides cost-cutting, FAW VW will launch more competitive and mass-market products whose annual sales could reach 100,000 to 150,000 units, like the Jetta, Qin said.

The venture plans to introduce the Golf A5, Bora A5 and Audi A3 according to the demands of the domestic market, he said.

FAW VW expects to sell 300,000 cars this year, the same as last year, he said. This includes 20,000 units of the newly-launched Caddy.

The 1.6 and 2.0 litre Caddy will retail between $18,100 and $20,200.

China’s car market grew by 15 percent year-on-year to about 2.4 million units in 2004. Growth slowed from more than 70 percent in 2003.

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